Judge lifts federal control of Butterfly Labs but keeps a cautious eye

An embattled Bitcoin miner manufacturer is set to find out exactly how it will be able to retake its corporate reins after having been placed under federal receivership. US District Court Judge Brian Wimes ordered the court-appointed receiver to "wind down" the procedures on Tuesday.

Further Reading

In late September, the Federal Trade Commission filed a civil lawsuit against Butterfly Labs (BFL) alleging that the company engaged in fraudulent and deceptive practices. As a result, the federal judge in Missouri imposed tight controls over the company to prevent its executives from moving money around.

But last week, the judge denied the FTC’s motion to extend that temporary receivership.

Federal authorities believe that the three named members of the company’s board of directors—Jody Drake (aka Darla Drake), Nasser Ghoseiri, and Sonny Vleisides—spent millions of dollars of corporate revenue on all kinds of things, including saunas and guns, while ignoring many customer orders that went unfulfilled or were significantly delayed. The FTC also alleges that the company used customer-ordered machines to mine bitcoins for its own benefit.

Thanks, guys

Jay Mayfield, an FTC spokesman, said in a statement that the case would continue. "We plan to continue our litigation in this matter and will move forward with this effort to protect consumers," he wrote.

Further Reading

BFL has rarely responded to Ars’ repeated requests for comment in recent months, including a request made on Tuesday. In a statement posted online on Monday, the company described the temporary receivership as an "unwarranted interruption."

"We are gratified by the opportunity to be heard and the Court's decision to allow us to return to work without the burdensome expense and operational handicap of a receivership," the company wrote. "We respect the FTC's role in protecting consumers from actual scams based on adequate investigation. But the FTC's very public labeling of Butterfly Labs as bogus and scammers has caused irreparable harm to our business; our customers, employees, business partners and shareholders have all suffered as a result of these actions."

Keeping an eye out

In the judge’s 13-page order, he outlined a number of problems with the FTC’s request to continue the preliminary injunction.

Judge Wines noted that the government’s evidence that BFL’s professed product delivery dates were knowingly false is "insufficient and does not establish that Plaintiff is likely to succeed in demonstrating the delivery date representations were false."

Second, he added that the FTC "has not demonstrated that Defendants are likely to return to alleged misconduct," adding:

The pre-order business model has resulted in a class-action lawsuit, another civil lawsuit, the instant lawsuit, and an investigation by the Kansas Attorney General. As a result of these lawsuits, Defendants have lost employees, upset consumers, and suffered business delays. Based on the current evidence, there is not a clear showing at this time that Defendants intend to reactivate the pre-order business model sufficient to justify the requested relief. In addition, the Court finds Plaintiff has not sufficiently shown that Defendants will make profitability representations absent an injunction.

Moreover, the proposed injunction is very onerous and affects activities that appear unconnected to the allegedly deceptive conduct.

However, that doesn’t mean that BFL is fully off the hook. Judge Wines also ordered BFL, per its own proposal, to submit monthly reports that detail its operational and financial status. That first report is due to the court, under seal, on January 20, 2015.

Cyrus Farivar
Cyrus is a Senior Tech Policy Reporter at Ars Technica, and is also a radio producer and author. His latest book, Habeas Data, about the legal cases over the last 50 years that have had an outsized impact on surveillance and privacy law in America, is out now from Melville House. He is based in Oakland, California. Emailcyrus.farivar@arstechnica.com//Twitter@cfarivar